The financial controller at TCW has been refining the system of internal controls and informs you, at the planning stage of the current year's audit, that he has put together an internal control manual for the company. He has stated that this manual will create greater awareness of controls in the company, particularly with management which, in the past, has not been overly conscious of the need to implement and enforce effective internal controls.

Management staff receive bonuses based on certain agreed-upon target ratios which include measures such as targeted monthly sales volumes, variance of actual to budget departmental overheads and profit before interest and tax. The Board takes an active interest in the performance of the company and is quick to request explanations on variances from the agreed-upon monthly budgets.

Two years ago, the company devoted significant time and resources to the development and implementation of a new IT system. All teething problems associated with the implementation phase have now been resolved, and the financial controller is satisfied that the automated controls in place are assisting in producing accurate and complete accounting records. The management accountant also looks after the IT function as the position is not regarded by management as being a full-time job. Once application programs have been tested, strict password control exists over access to the programs. Passwords are not required for access to databases.

To assist in the planning for the current year's audit engagement, you extracted the following information from a review of the systems notes in the permanent file and a perusal of the new internal control manual:

There are three section managers, one each for grape production, wine production and beef production. Each can order supplies for their respective operations up to a limit of $10,000 for each order. Orders between $10,000 and $30,000 must be approved by the management accountant. Orders over $30,000 must be approved by the CEO. Orders over $50,000 must be approved by the Board.

Orders must be made through the computer ordering system which has direct links to the approved suppliers.

Supplier information is contained in a supplier master file. Each supplier has a unique supplier code. If a section manager orders from an unapproved supplier, the order is rejected and sent to the management accountant for approval.

The supplier information file is maintained by the accounts clerk. Changes to the file are approved manually by the management accountant.

When supplies are received at the winery, the storeman checks the supplies received to the online copy of the order and the delivery docket provided by the supplier. Any discrepancies are noted on the online copy of the order.

The delivery docket is filed by the storeman in a folder that is kept at the winery.

The invoice is received electronically from the supplier and matched to the order by the accounts clerk. If the order and the invoice match the invoice is included in a payments file.

The payments file is approved online by the management accountant once a week and used to generate an ABA file which is then uploaded to the bank by the management accountant.

When the payments file is approved by the management accountant, the invoice is automatically recorded as being paid in the accounting system.

When services such as repairs are ordered for the winery by the wine production manager, a service order is generated within the computer system and automatically sent to the service provider.

When the service has been delivered, the wine production manager or the storeman signs the service delivery docket on the service mans tablet.

The invoice from the service company, with a copy of the signed service delivery docket, is received online by the accounts clerk.

The accounts clerk checks the signed service delivery docket to the invoice and the order and adds the invoice to the payments file for final approval by the management accountant.

In the case of discrepancies, the accounts clerk contacts the supplier and the wine production manager to resolve the issue. Payments are not made until the issue has been resolved.

Required

Write a report, including a brief executive summary, to your managing partner that addresses the questions below. Where indicated, use the required format to answer that question: Question 2A 7% Identify the internal controls in the system that are potentially effective, the risk that the control could alleviate and one test of control for each of the identified potentially effective controls. Answer this question using the following headings:

Effective control	Risk alleviated	Test of control

Question 2B 2% List and justify the weaknesses in internal control for purchases and accounts payable.

Weakness	Justification